Corporations Outline
Bullard
Spring 2016
Business Associations
Form of an Organization: Key Factors
Limited Liability
Simplicity & Cost
Sole Proprietorship: Unincorporated, personally liable
Key Factors
Limited Liability: None
Taxes: None (personal)
Simplicity & Cost: Very Simple – No cost b/c no business
Flexibility: Very flexible b/c owner does whatever he wants
Advantages
Direct control
Simplicity
Lower expenses
Taxes:
Reports Net income/loss from business on personal federal income tax return (schedule c on 1040)
Business does not file taxes
No double taxation
Disadvantages
Unlimited liability – personally on the hook for any torts arising from the business
Dependent on the management of the owner (death business lost)
Not easily transferred
Partnership: equivalent to sole prop but with partners
Key Factors
Limited Liability: None – all partners are liable
Taxes: Pass Through Taxes – Taxed under Subchapter K of Internal Revenue Code – Business does not pay federal income taxes – The business profits/losses are allocated to partners based on partnership agreement (their interest in company) – Partners reports their shares on personal federal income by attaching a Schedule E on 1040)
Simplicity & Cost: Very Simple – Lower expenses
Flexibility: Flexible – Partnership agreement
Class Notes: Inadvertent partnership – You could lose your business by thinking some dude is just going to work for you and eventually he ends up with half of the company. Now you are on the hook for promises he makes & could lose your house b/c of that fucker
Advantages
No separation of ownership and control (agreement)
Flexible and simple
Lower expenses
No double taxation
Disadvantages
Unlimited liability
Complex structure
Partner cannot sell his interest; if a partner dies then the partnership is dissolved
Limited Partnership – 1 or more general partner(s) + one or more limited partner(s)
Key Factors
Limited Liability: Limited liability for LPs. (not for general partner)
Taxes: Pass Through Taxes – Same as General Partnership
Simplicity & Cost: Complex Structure – Lower expenses
Flexibility: Partnership Agreement like a GP so tailored to client’s needs
Advantages
Limited liability (not for general partner) – for LPs
Separation of ownership and control
Lower expenses
Disadvantages
Unlimited liability (for general partner)
Complex structure
Passive Limited Partners – They do not have any control; only GPs do
Transferability
Limited Liability Company (LLC) – Business That Filed Articles of Organization
Key Factors
Limited Liability: Limited liability for all owners
But Still liable for
Personal Torts
Co signed loans
Acts outside the scope of employement
Taxes: Pass Through Taxes – Same as General Partnership & Sole Prop.
Tax on Ghost Income – Paying taxes on LLC profit but Safely never got any income b/c (enough revenue wasn’t generated to pay out to her?)
Simplicity & Cost:
Flexibility: Operating Agreement; so tailored to client’s needs
Can you have shares & stock in an LLC? SHs?
RECAP: Chancy can still be liable in a LLC for
– Personal Torts
– Personally guarantee a loan
– Outside the scope of employment in an indemnity
Advantage
Limited liability
Separation of ownership and control
Lower expenses
No double taxation
Disadvantages
Transferability restricted by agreement and laws
Limited Liability Partnership (LLP) – 2 or more owners who have filed “Statement of
. higher salaries and perquisites)
Expensive reporting and registration
NO FLEXIBILITY
Week 1 (notes unrelated to above)
A) *Triumptive of Protection
1) Limited Liability
2) Insurance
Limits
Loss Not covered
Loss exceeds coverage
Claim denied
Insurer fails
3) Indemnification – another type of insurance; insurance of release
Limit – probably doesn’t include
Fraud,
Gross negligence, (don’t want the CEO to think he is covered for fraudulent activity, gross neg, or admission of guilt b/c the company is most liable in those situations)
And for there to be indemnification, the act probably needs to be in the scope of employment
CEO has indemnification with the company on a claim by 3rd party
You can get indemnification on Criminal crime
BUT no guarantee the company will have the money to pay you
These are written broadly so you won’t have coverage denial like insurance
Remember indemnification is circular is Corp brings suit against an employee who is indemnified
B.) Who will pay for pending transactions
Will include indemnifications for the new business you just acquired for pending litigation
*Remember to include indemnification clause even if you are not indemnifying anything! Just b/c it is so prominent
“Corporations are people” – Very true – think about them as people b/c they can function and have rights like people
ex) religious freedoms – Chickfilet: closed on Sundays – no insurance on contraception
(Check list on PPT of the corp. rights)
